NEW YORK (AP) -- Healthways Inc. shares declined Tuesday after a Citi Investment Research analyst said the wellness program operator's net income won't live up to Wall Street forecasts.
THE SPARK: Analyst James Naklicki began covering the stock with a "Sell" rating and a price target of $9 per share. Naklicki noted that Wall Street expects the company's profit margins to grow significantly and its income to more than double in 2014. He said that will be difficult because new contracts are less profitable in their first year to 18 months, and the company may have to make new investments in its business.
"We think contract losses, lower margins on new business, and less favorable rates on renewed contracts will pressure margins relative to the consensus view," Naklicki wrote in a note to clients. He added that Healthways might also ramp up its investment as new provisions of the 2010 health care reform law go into effect, which could limit its profits.
Wall Street expects the company's earnings per share to more than double to 72 cents in 2014 from 33 cents in 2013, according to a survey of analysts by FactSet. Naklicki estimates Healthways will earn 50 cents per share in 2014.
THE BIG PICTURE: Healthways has announced a spate of new contracts in late 2012. The Franklin, Tenn., company expects to spend more money to implement the deals, and the contracts will also take time to reach their full revenue.
CEO Ben Leedle said he expects the company to report $85 million in organic revenue growth from new contracts in 2014.
SHARE ACTION: Healthways stock fell 55 cents, or 5.1 percent, to $10.25 in afternoon trading. The shares have gained 22 percent since mid-November.